Public Debt and the Political Economy of Reforms

Abstract

We develop a two-period model of redistributive politics in which two politicians compete for election in each period. In the first period, the politicians propose both whether to implement an e fficient reform and choose the level of public debt. Politicians also allocate pork-barrel spending to targeted voters in each period. We show that allowing politicians to raise public debt ensures that reforms are always implemented when reforms' bene fits have mainly a private good nature. This is not the case when reforms are pure public goods. Restrictive limits on debt unambiguously decrease the success of reforms in the political process. (joint with Christoph Esslinger)